“Most of Pengana’s funds have low or no correlation to market returns,” says Crowley. “You don’t want the funds that you invest in to all have a high correlation to each other and the markets otherwise the diversification benefit is reduced.”

Managerial skill is the second key topic to ask about, he says.

“How much of the return that has been generated is just from the market – for example beta – and how much is skill-based or alpha?

“You want some of the funds you invest in to be truly active or benchmark-unaware and be able to go to cash or vary net market exposure to reduce the market risk of the portfolio.”

Thirdly, the risk-metrics of a fund are important. These include its Sortino ratio, downside deviation, maximum drawdown, percentage outperformance in down markets, and percentage outperformance in up markets, he says.

Finally, an adviser needs to check the fund manager’s alignment of interest with the portfolio and the fund’s outcomes.

“So, properly structured performance fees are good for investors because you want to have incentives for the fund manager to perform that aligns the fund manager’s interest with investors’ interests,” Crowley says.

“You want the fund manager to have an economic interest in the fund – that the fund manager owns ‘x’ and has a financial interest in the profit and loss. The fund manager has to have an economic interest and be incentivised.”

Can you show me proof that you can consistently beat the benchmark index after fees?

Can you show me proof that you have consistently beaten your peers who have the same objective?

Can you show me proof that you've been correct in forecasting the future consistently; i.e. you have gone to cash at the right times. Can you show me when you did it and give me confidence that you getting it right was more than just luck?

Finally, how much of a tax headache are you going to cause me by jumping in and out of the market? If I'm a HNW client in the top marginal tax bracket and invest with you, what is my after tax return compared to benchmark? Compared to your peers.

WP can you interview Damian again and get his answers for us...bearing in mind us advisers know what data mining is (so please be as transparent as possible).

alleycaton
9/12/2013 10:31:24 AM

Dear Mathew, I think there are more important questions to ask a fund manager.

Have you ever gone to a presentation and all you get is the good news ? Perhaps you should be asking them, What did they get wrong, what did they learn from it and finally, would they do it again.And they will tell you because.... you see no Fund Manager bats 1000 and gets it right 100.0% of the time nor do financial planners.

The issue for clients is for us to understand how and where fund managers invest money so that the client has some sense of the risks involved and has some knowledge of the process.

Damian Crowleyon
16/12/2013 9:05:52 AM

Matthewthankyou for your responseFor all our funds they have outperformed their relevant stated benchmark indices significantly since each funds inception(all funds have a track record of at least 5 years) and all have met their investment return and risk return objectives and we can provide all details on thisAll our funds are focused on generating performance and not just increasing their FUM which I why we limit the capacity of all our funds and close them once the investment teams believe FUM is at a level that will not compromise performanceOur funds are consistently in the top quartile of performance relative to our peers and we can provide this informationIn terms of our cash holdings, only one of our funds(our Australian Equities Fund) can have different levels of cash and its level of cash is not based on a market timing decision, it is an outcome of whether there are suitable equity investments available to invest in that meet our investment criteria and justify moving money out of cashEach of our funds has different tax outcomes. However our Australian Equities Fund has delivered excellent after tax outcomes because of the types of companies that it is investing in that tend to have high levels of franked dividends.Whilst we are very tax aware and try to maximize after tax returns to unitholders, tax is not the main driver of our investment decisionsregards

Damian CrowleyDirector of DistributionPengana Capital

Matthew Rosson
16/12/2013 9:21:23 AM

Thanks for your reply Damian. Great to get the opportunity to ask questions in an open forum.

The first of my questions was "Can you show me proof that you can consistently beat the benchmark index after fees?"

Your Aussie Equities Fund (PLC0005AU) has done fantastic over 5 years; outperformed the benchmark. However over the past 6 months, the fund underperformed the benchmark by 6%, and by 3% over the past 12 months (to end of November).

The Aussie market (ASX300) did 22% which was great but your fund did 19%, what happened?

The long term performance is what really matters; the market performs well over the long term itself so this isn't a fundamental investment question, it is understanding more about the skill that you employ to beat the market.

Paton
16/12/2013 10:26:50 AM

My questions are:

1. Given all managers say that "past performance is is not a reliable indicator of future performance", on what basis can we be confident that a given manager will outperform an index like ASX300, given, on average, most do not over periods of 5 years or longer?

2. Why are performance fees touted as aligning the manager with the investor compared to normal fees? The implication is that the manager charging flat percentage fees is not incentivised to maximise risk adjusted performance. I am sure they would disagree.

3. When will managers start to report in after tax return terms?

4. If we seek to believe in manager skill, how does the average investor and planner pro-actively deal with fund manager departures? If it isn't the skill of a manager, then it is a process that can be replicated and, therefore, this skill traded out of the market.

5. Given the importance of asset allocation, why would you not want a fund that has a higher correlation to the risk premiums the investor is seeking?